Archive for November, 2012

Reinsurance Protection: Aggregate covers - Reinsurance remains the best form of protection against catastrophe losses. Following the increased frequency of major catastrophic events witnessed in 2010 and 2011, many companies are revisiting the benefits of aggregate coverage. Aggregate coverage has long been offered in the reinsurance market because it is a solution that focuses on mitigating the impact of the frequency of loss. While much of the focus for catastrophe coverage is around severe shock losses, aggregates are also useful for horizontal coverage needs or a combination of frequency and severity.

Taking Control of Quantifying Your Natural Catastrophe Risk:Amidst the fast pace and frequent trends and changes in the market, a single business conversation can stand out. With the passage of time, one sees that it was a precursor to what would become a consistently held view - a sort of drumbeat of the times.

Superstorm Sandy: Initial Impacts and Implications:Guy Carpenter has published a new briefing: Superstorm Sandy: Initial Impacts and Implications. As documented by the National Hurricane Center, Superstorm Sandy made landfall as a post-tropical cyclone at 8PM EDT, Monday, Oct 29, 2012, with maximum sustained winds of 80 miles per hour.

Guy Carpenter Publishes Second Annual Insurance Risk Benchmarks Report: Guy Carpenter has published its second annual Insurance Risk Benchmarks, a resource designed to help insurers assess risk parameters and improve economic capital modeling. The report provides benchmarks for underwriting and reserve risk by line of business and by industry segment for U.S. exposures, and can be used by insurers when benchmarking their economic capital models.

Chart: Reinsurance Valuations at a Long-Term Low: The challenging macroeconomic environment of subdued growth and low interest rates meant the reinsurance sector ended 2011 trading near 20-year lows. As the chart below illustrates, the average price to book ratio for the sector of 0.893 is just greater than one and a half standard deviations down from the 20-year average of 1.32.

Why Do Results for North Carolina Differ So Dramatically Between ALPHA and GAMMA?

Overall frequency is similarly modeled for North Carolina in both ALPHA and GAMMA. However, GAMMA has slightly higher overall modeled frequency (historical view), while ALPHA has a measurably higher modeled frequency of Cat 3-5 storms for North Carolina, and therefore fewer lower severity Cat 1-2 storms versus GAMMA.

In the ALPHA model, North Carolina storms generally have larger footprints, pushing the storms further north and west, even producing losses in areas where GAMMA does not generate any loss. For a state like North Carolina, where there are high exposure values inland, this is generally a key driver for larger ALPHA losses in the state. Factors that could reverse the aforementioned ALPHA and GAMMA comparison are usually not strong enough to reverse the general statewide observations. Such factors include a larger GAMMA damage ratio especially at higher wind speeds (impacting coastal counties) and larger wind deductible impact modeled in ALPHA.

Inland portfolios modeled in ALPHA are impacted by ALPHA’s slower wind decay for storms making landfall in North Carolina, typically resulting in larger losses for those portfolios versus GAMMA. The example in Figure 2 from Hurricane Isabel shows losses going all the way up to northwest Pennsylvania, which seems to be consistent with the reported impacts of the storm. Historical storm loss footprints for Hugo (1989), Fran (1996) and Floyd (1999) show similar patterns, with GAMMA losses typically truncated geographically more so than observed for these actual events.

Amidst the fast pace and frequent trends and changes in the market, a single business conversation can stand out. With the passage of time, one sees that it was a precursor to what would become a consistently held view - a sort of drumbeat of the times.

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice PresidentContact

Guy Carpenter is uniquely positioned to help clients successfully grow their business in emerging markets. Our GC Global Analytics and Advisory team offers services and solutions that include industry-leading risk analytics, strategic and technical advice and capital advisory. We employ over 300 modeling, actuarial and advisory professionals through our GC Analytics®**, Global Advisory and GC Securities* teams who closely collaborate with Guy Carpenter’s global broking force to deliver the best insights and growth opportunities to our clients. We encourage you to contact your Guy Carpenter representative to review and discuss your modeling, advisory and capital needs in more detail. Among the specific services and tools we utilize and offer are proprietary modeling, the i-aXs® data management platform, MetaRisk®, portfolio management, predictive analytics, advisory services and actuarial expertise.

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice PresidentContact

Aggregate Covers

Reinsurance remains the best form of protection against catastrophe losses. Following the increased frequency of major catastrophic events witnessed in 2010 and 2011, many companies are revisiting the benefits of aggregate coverage. Aggregate coverage has long been offered in the reinsurance market because it is a solution that focuses on mitigating the impact of the frequency of loss. While much of the focus for catastrophe coverage is around severe shock losses, aggregates are also useful for horizontal coverage needs or a combination of frequency and severity.

Catastrophe Models: Implications of Emerging Market Growth on the (Re)insurance Sector: Natural disaster risk assessment relies on probabilistic catastrophe models and historical data. The three main catastrophe modeling companies, AIR Worldwide (AIR), EQECAT and Risk Management Solutions (RMS), have therefore traditionally created modeling solutions for perils and territories considered to be peak risks. Although each modeling company has in recent years launched products for countries outside the more established markets of the United States and Western Europe, several gaps in coverage remain, particularly in emerging markets.

Superstorm Sandy: Initial Impacts and Implications:Guy Carpenter has published a new briefing: Superstorm Sandy: Initial Impacts and Implications. As documented by the National Hurricane Center, Superstorm Sandy made landfall as a post-tropical cyclone at 8PM EDT, Monday, Oct 29, 2012, with maximum sustained winds of 80 miles per hour.

Terrorism: Global Terror Attacks and Hotspots:The increasingly diverse and dispersed threat has seen worldwide terrorist activity rise in recent years. The number of global terrorist attacks peaked at more than 14,400 in 2006 (see Figure 1). Although there has been a slight dip in the number of attacks over the last five years, they remain at historically high levels. Attacks increased dramatically in Afghanistan and Iraq following the deployment of coalition combat troops. Several other countries have also witnessed a big jump in terrorist activity recently, including Pakistan, Yemen and Somalia.

Guy Carpenter Publishes Second Annual Insurance Risk Benchmarks Report:Guy Carpenter has published its second annual Insurance Risk Benchmarks, a resource designed to help insurers assess risk parameters and improve economic capital modeling. The report provides benchmarks for underwriting and reserve risk by line of business and by industry segment for U.S. exposures, and can be used by insurers when benchmarking their economic capital models.

Periodic Payment Orders - Issues and Implications for Reinsurance: Following the passage of the Courts Act 2003, which gave courts in England and Wales the power to impose rest-of-life structured settlements, known as periodical payment orders (PPOs) to provide for the long-term care and loss of earnings of severely injured third parties, the actual incidence of such awards in the market has been relatively low. It is clear however that the trend towards PPOs has accelerated over the past year, partly driven by low interest rates. This trend presents real challenges to both insurers and reinsurers of casualty classes, particularly for motor.

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice PresidentContact

Making use of all available tools and practicing comprehensive exposure management will both strengthen (re)insurers’ ERM practices and allow them to make informed risk management and reinsurance decisions as they enter new markets. Certainly, flood risk is prevalent and increasing in almost every developing economy. Recent studies by Swiss Re (1) and the Organisation of Economic Co-operation and Development (OECD) (2) suggest flood loss potential will grow as emerging economies continue to prosper.

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice PresidentContact

Despite such important model limitations for earthquakes, the lack of modeling solutions for flood risks poses an even greater threat to (re)insurers. As illustrated by Figure 7 below, flood risk is poorly modeled at a global level by the three main modeling companies, particularly in developing countries where flooding is a regular occurrence.

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice PresidentContact

Natural disaster risk assessment relies on probabilistic catastrophe models and historical data. The three main catastrophe modeling companies, AIR Worldwide (AIR), EQECAT and Risk Management Solutions (RMS), have therefore traditionally created modeling solutions for perils and territories considered to be peak risks. Although each modeling company has in recent years launched products for countries outside the more established markets of the United States and Western Europe, several gaps in coverage remain, particularly in emerging markets. This means that (re)insurers are currently struggling to monitor and measure their exposures in non-modeled countries. Moreover, for the models that exist, it is important that (re)insurers are aware of their limitations and consider the impact that these shortcomings have on their ability to control and price their risk exposures.

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice PresidentContact

Although improvements in ERM practices meant (re)insurers were better prepared for the major catastrophes of 2010 and 2011 than those in 2005, the global nature of these losses has prompted some companies to review their perception of risk. This international loss trend, along with insurance growth in emerging market regions, is driving the need for better and more comprehensive tools for modeling risk. It also reinforces the need for (re)insurers to carefully consider how and where they diversify their business geographically and the adequacy of pricing in these territories.